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Capping rates and fees does as much harm as good

Capping rates and fees does as much harm as good

The editorial board at the Brownsville Herald in Texas penned an illuminating editorial yesterday that echoes arguments we’ve long made about the short-term lending industry: interest rate and fee caps don’t work. Instead, the caps effectively render short-term lenders unprofitable, forcing them to close up shop, cutting off access to credit for a large swath of consumers.

From the editorial:

“Researchers at the University of Washington’s Evans School of Public Affairs have studied the issue, seeking to learn what happens to borrowers when payday loans and other short-term credit is restricted.

“They found that such lenders don’t lower their rates; they leave the market, making loans less available for those who need them. Perhaps surprisingly, the study found that profits aren’t high on such loans. The cost of providing short-term credit is higher, return on smaller payments is lower, and default rates are higher.

“Default rates drive interest rates; the higher the risk the higher the rate.

“The study also found that regulations don’t help borrowers. Without short-term loans they raise emergency cash by pawning items, paying bills late and using bank overdraft services. High fees on these services compare to the cost of payday loans.

“The study’s conclusion: ‘Household financial security does not necessarily improve after payday lending is prohibited through rate and fee ceilings. …'”

Read more at BrownsvilleHerald.com. Photo by svilen001.

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CFPB releases updated complaints data

CFPB releases updated complaints data

A new report from the Consumer Financial Protection Bureau indicates a relatively low volume of complaints leveraged against the short-term lending industry – and the bulk of those complaints are levied against online lenders. Between July 21, 2011 and June 30, 2014, the CFPB received approximately 395,300 consumer complaints. Just 1% of those complaints addressed “payday lending”:

CFPB complaints

Mortgage lending, debt collection and credit cards were the three most active complaint categories over the past three years. Within the “payday lending” category, online loans generated nearly two-thirds of all complaints:

types-of-loans

Those complaints were broken down into the following categories:

types-of-complaints

The CFPB’s complaint statistics reinforce our long-standing position that consumers should be wary of non-OCLA member online lenders (particularly off-shore or out-of-state lenders). When possible, obtain a loan in person at a brick-and-mortar store where a representative can help you answer any questions, explain rates and fees, and ensure you understand the terms of your loan. Always ensure you’re doing business with OCLA member. Our staff can work with you and our member companies to resolve any issues that may arrive. Please call (866) 595-1301 for assistance.

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Journal article details misconceptions about short-term loans

Journal article details misconceptions about short-term loans

Ronald L. Rubin of Hunton and Williams LLP offers up several poignant points about the short-term lending industry in an article that ran in the Wall Street Journal this week:

The CFPB wants to keep payday loans available to people who repay them quickly and deny the loans to those who don’t. That may sound reasonable, but as is the case with credit cards, rejecting profitable borrowers while lending to unprofitable ones is not a viable business. Payday lenders would be forced to charge even higher interest rates or shut down. Either outcome would limit access to credit, contrary to the CFPB’s official mission.

The CFPB should only create programs to educate consumers about payday loans, pass regulations to ensure that lenders follow existing laws and prosecute businesses that don’t treat borrowers honestly. The Dodd-Frank law requires these actions, and no more. The CFPB wasn’t created to protect consumers from themselves.

Read the full article here.

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Customers choose wisely between overdrafts and short-term loans

Customers choose wisely between overdrafts and short-term loans

bankThe average fee for a short-term loan is straightforward: $15 per $100 borrowed. Contrast that with overdraft protection, which typically costs $27-$35 regardless of the size of the overdraft. Since overdraft protection can be used to cover immediate cash shortages, they do, in effect, compete with short-term loans.

“If consumers are rational, they will tend to use payday loans to cover smaller bills and overdraft protection to cover larger bills,” writes the Washington Post. “Sure enough, an ingenious study by Brian Melzer and Donald Morgan find exactly that result.”

It’s an interesting finding that demonstrates rational behavior on the part of consumers. It also points out the fact that in states where short-term loans are banned, overdraft protection typically remains unregulated and serves as a proxy for short-term loans.

Consumers can and should be allowed to choose from a range of borrowing options. Competition helps lower fees, and that’s better for all borrowers. In the words of Todd Zywicki of the Post:

“Regulators cannot wish away the need of low-income consumers for credit. … Congress can pass all the laws it wants, but it can’t repeal the law of supply and demand and the law of unintended consequences.”

By restricting short-term lending, lawmakers may unwittingly be taking away an option that can save consumers money. That’s bad for consumers, and it’s a key education point that the OCLA is committed to sharing with legislators and the public.

Photo credit: Phaser4.

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Industry Employee of the Month: Chris

Industry Employee of the Month: Chris

OCLA interviewed Chris, a manager in the short-term lending industry in Mt. Vernon, Ohio in March 2013. Here’s a transcript from the interview:

What do you like about your job?

What I really like most about working for Advance America is being able to help my customers. When my customer pays their loan off, and they say ‘Thank you for helping me,’ that really is satisfying.

What types of benefits do you receive?

We have good benefits: health insurance, we’re able to invest into 401Ks, the pay is good. It’s nice to have a steady income that we can rely on.

Has there been a specific time where these services have helped someone in a crisis?

Yeah. I had an older fellow during my first year coming to work here. He came up from Florida during the summer living with his family with his wife, and she got very ill. And he came in here almost in tears. He needed money for her medication, and we were able to loan him. He had been a customer before he moved to Florida, and so it was just a matter of updating him. Then, when he came and paid it back the next month, again in tears and just saying ‘Thank you so much. If it wasn’t for you, I don’t know if my wife would have survived.’ That, quite honestly, is the most fulfilling thing I can think of.

Do you feel you are upfront and transparent with charges for services?

Yeah. We tell everybody this is what the loan is, this is how much it’s going to cost you, this is what the payback is and you’re due on this day. We even go so far as to let them know if there are any late fees involved. We just make sure that they understand that when they’re getting a loan, what they’re getting, and how much it’s going to cost them in the end.

Can you share a time when you were able to protect a customer from becoming a victim of fraud?

We get customers all the time who say, ‘I got this letter,’ and they bring it in, we look at it, and we’re able to tell them, ‘You know, this type of fraud is going on.’ We had a lady come in last summer, and she was trying to send $3,000 to Canada because her grandson was in jail in Canada, and that’s a typical scam that people are doing – getting asked to send money to the grandson you haven’t seen in 10 years. We were able to not send that for her and save her money.

What do you think would happen to the local economy if these services were eliminated?

I think it’d be pretty tough on folks because for a lot of people, this is their only resource. We have customers who come in and say ‘Thank you for being here, I don’t know what I would have done without you.’ Those aren’t folks who have other traditional means to turn to. They have to come to a lender like us or they’re not going to get the help they need. When you need a $300 brake job done, and you don’t have someone to turn to for that, we can do a $300 loan for almost any person who walks in the door, and they can get their brakes fixed. Otherwise, they’re not going to work tomorrow.

What would you say to those people trying eliminate these services?

If they eliminate these services, you’re going to see higher bankruptcies. That happened in Oregon. That happened in North Carolina when that took place there. They’re going to see people with no place to turn to, and it’s just going to cause legitimate hardship for people. If we keep the services, they have some place to turn to. We are a very ethical lender. We take care of our customers.

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Why the working poor and banks are a bad match – An article by the American Banker

Why the working poor and banks are a bad match – An article by the American Banker

Click the link or picture below to listen to Lisa Servon, a professor at the New School in New York, discuss her experiences working as a teller at a check-cashing business.   This article and video was produced  by the American Banker’s Association

The Consumer Financial Protection Bureau is expected to draft rules governing payday lending this year. But the conventional wisdom that will likely guide it is based on false perceptions about the working poor and the best way to serve them.

So argues Lisa Servon, a professor at The New School in New York, who spent four months as a teller at a check-cashing business in the South Bronx and three at a payday lender in Oakland, Calif. Servon’s conclusion is that many low-income consumers fulfill their financial needs outside the regulated banking system by choice and in many cases are better off for doing so. The professor of management an urban policy explains why she believes bankers and policymakers are wrong in many of the conclusions they’ve drawn about underbanked and the types of financial services that would best cater to them.

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Consumer of the Month: Janette

Consumer of the Month: Janette

OCLA interviewed Janette from Mt. Vernon, Ohio in March 2013. Here’s a transcript from the interview:

Do you feel that the charges for these services are up front and transparent?

Yes. They’re very friendly. They’re upfront. They explain everything to you, and you know their fees. You know when you’re due back.

Has there been a time when these services have helped you through a crisis?

Oh yeah. There have been several times that they helped me out of a jam; not only me but my daughter and my grandchildren where I could come here and get a loan on my paystub where going to a bank to try to get a loan isn’t so easy. It would be impossible for me to get a loan if I weren’t coming here.

Do you feel this industry tries to trap you in a cycle of debt?

I think in an unfortunate situation they are the only alternatives that we have, and it’s good that they’re here or you would be in a jam that you couldn’t get out of at all.

What would happen to you or the community if these services were eliminated?

I think there would be a lot of people in trouble. Probably more violence, probably more breaking and entering because people get desperate when they’re in a desperate situation, and they can’t get any help.

What would you say to those people trying eliminate these services?

I would probably say please don’t do it because it’s the only thing I have when I get in trouble to be able to come and get some help. I am a grandmother and I have college students in school, I have grandchildren and when you’re in need and they have a flat tire and they’re alongside the road, and they need a tow truck, you have to be able to go to somebody to be able to get some help for you and your kids. Please don’t shut places like this down because that’s where we get our help.

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Wall St. Journal article – “Cracking down on payday lending will drive borrowers to less savory creditors.”

Wall St. Journal article – “Cracking down on payday lending will drive borrowers to less savory creditors.”

The following article was published in the Wall Street Journal on Nov. 26, 2013. This article discusses how British Chancellor of the Exchequer George Osborne is making a mistake by instituting new regulations on payday lending.  The article cites examples of “unintended consequences” in the U.S. in states such as Georgia and North Carolina.  Interesting read.

Osborne’s Next Bad Idea
Cracking down on payday lending will drive borrowers to less savory creditors.

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Updated Nov. 26, 2013 8:53 p.m. ET

George Osborne has spent much of the last three years decrying a lack of available credit for the little guy. But now the U.K. Chancellor has hit upon an idea to help hard-up people to whom banks won’t lend: crack down on the lenders that do.

Mr. Osborne announced Monday that bank reforms going through Parliament this week include instructions to the U.K.’s consumer-finance regulator to cap the cost of so-called payday loans—typically high-interest, short-term, three-figure loans to tide customers over until their next paycheck. As he explained to the BBC, the new rules will limit “the total cost of credit, looking at the whole package,” fees as well as rates, as “a way of making sure that hard-working people are served by the banking and the credit system.”

The government estimates that payday lending was worth roughly £2 billion in 2011-12, up from £900 million in 2008-09. The industry’s popularity since the 2008 crash has made it a pet bugaboo of the regulatory left. Wonga.com, an online lender that booked a £62.5 million profit last year, has had its ads banned by the Advertising Standards Authority. Headlines scream that Wonga and its peers charge four-digit annualized percentage rates. Wonga’s 1% daily interest rate would add up to an APR of 5,853%—if Wonga didn’t stop charging all interest after 60 days for its 30-day loans.

The government has so far resisted calls to cap the industry’s rates and fees, rightly warning that price controls would only restrict supply. They will also drive those who need money, but can’t qualify for loans under the new rules, to less savory credit channels.

Consider the experience of the U.S. states of Georgia and North Carolina, which banned all payday lending in 2004 and 2005. Borrowers instead went out of state or to less scrupulous creditors. The preliminary result, according to a 2007 study by the Federal Reserve Bank of New York, was that relative to other U.S. states, households in Georgia and North Carolina “bounced more checks after the ban, complained more about lenders and debt collectors, and were more likely to file for bankruptcy.” Some consumer protection that turned out to be.

People often turn to payday lenders because they have little choice, often on account of their credit histories. That’s why they’re often bigger credit risks. Barring lenders from charging enough to cover those risks can only result in less access to loans for people who need them.

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New Harris Poll: 9 in 10 borrowers felt product met their expectations

  • 84% of Borrowers Say It Was Easy to Repay Their Loan

  • 95% of Borrowers Agree Using Payday Lending Should Be Their Choice, Not the Government’s

More than nine in 10 payday loan borrowers report their experience with the terms (96 percent) and cost (92 percent) of their payday loans was as expected or better than expected, while more than four in five borrowers (84 percent) say it was very easy or somewhat easy to repay their loans, according to a new national survey commissioned by Community Financial Services Association of America (CFSA) and conducted by Harris Interactive, an international and research polling company, by telephone among 1,004 respondents ages 18+, who are customers of store-front companies within the CFSA, and took out a loan which they repaid in the summer of 2013.Screen Shot 2013-12-16 at 10.17.05 AM

Harris Poll

As the first in-depth examination of borrowers’ motivations and rationale, the survey found an overwhelming majority of borrowers are very satisfied or satisfied with their recent payday loan experience (91 percent), carefully weighed the risks and benefits before taking out a loan (93 percent), and value having the option to take a payday loan (95 percent).

Notably, borrowers almost unanimously agree that it should be their choice whether or not to use payday lending, not the government’s choice (95 percent).

“The great majority of borrowers we surveyed said that, for them, payday loans are an important and valuable credit option that helps them overcome financial shortfalls,” said Humphrey Taylor, Chairman of the Harris Poll at Harris Interactive. “Our survey findings reveal almost all borrowers understood the cost of their loans and how long it would take to repay them.”

In contrast with common misconceptions about payday loans and those who borrow them, the poll reveals that borrowers fully understand their options and choose the service over a variety of other financial services offered by banks and non-bank lenders:

  • 97 percent of borrowers agree that their payday lender clearly explained the terms of the loan to them, including nearly nine in 10 (88 percent) who strongly agree.
  • 68 percent prefer a payday loan over incurring a late fee of approximately $30 (4 percent) or an overdraft fee of $35 from their bank (3 percent) when faced with a short-term financial crisis and unable to pay a bill.
  • Fewer than one in 10 (8 percent) said that a payday loan was their only option and they had no other resources available.

“The voice of the customer rings loud and clear, and the survey shows they not only understand the terms of their loans, they also value having this credit option and use it responsibly,” said Dennis Shaul, CEO of CFSA. “The results also reflect the integrity and commitment of our members who work with borrowers to ensure their experience with the payday loan is a positive one.”

 

Numerous studies have examined the economics and policy implications of short-term lending, but this Harris survey is the most comprehensive examination of payday loan borrowers’ experiences – specifically those who borrowed from regulated, licensed lenders:

 

  • 95 percent say payday loans can provide a safety net during unexpected financial difficulties.
  • 94 percent say they were able to repay their loan in the amount of time they had expected to.
  • 89 percent say they feel more in control of their financial situation because of this option when they need it.
  • 68 percent say they would be in worse financial condition than they are now without the option of taking out a payday loan.

“Credit markets are always evolving, but there remains a clear need for short-term, small dollar credit,” Shaul continued. “As an industry, we are always looking at ways to improve the customer experience and our products, and we look forward to working with regulators at all levels to ensure that credit – such as a payday loan – is available to all Americans.”

The full results of the poll can be found at www.harrispaydayloanpoll.com.

 

MEDIA CONTACT:

Amy Cantu, Communications Director

Amy Cantu (e) acantu@cfsaa.com (p) 703-842-2092

To see the release on the wire, please click here.

About Harris Interactive

Harris Interactive is one of the world’s leading market research firms, leveraging research, technology, and business acumen to transform relevant insight into actionable foresight. Known widely for the Harris Poll® and for pioneering innovative research methodologies, Harris specializes in delivering research solutions that help us – and our clients – stay ahead of what’s next. For more information, please visit harrisinteractive.com.

About the Survey Methodology

Harris Interactive conducted a telephone survey on behalf of the Community Financial Services Association of America (CFSA) from October 9 – 24, 2013, among 1,004 U.S. respondents ages 18+, who are customers of store-front companies within the CFSA, and took out a two-week payday loan of $700 or less which they made final repayment of in July or August of 2013. Data are unweighted and are a representative probability sample of the population who were surveyed.

 

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Consumer of the Month: Trina

OCLA interviewed Trina from Mt. Vernon, Ohio in March 2013. Here’s a transcript from the interview:

Do you feel that the charges for these services are upfront and transparent?

Oh yeah, they let you know right up front. You have papers that you sign that you have plenty of time to read and look at.

Has there been a time when these services have helped you through a crisis?

Sure. I’ve had children that have been in a bind before. They live out of state, so sometimes accessing money really quickly is really hard to do. You can come in here at any time, borrow against your paycheck knowing that it’s coming in in a week or two and get it where you can’t just go – if you’re with a big corporation – go to them and get an advance on your pay. You may not be able to walk into a bank and just get a loan instantly and money right away.

Do you feel this industry tries to trap you in a cycle of debt?

I have to disagree with that, and I’ve heard that in the past, but most people especially in small towns like this where there’s not a whole lot of opportunities to have a really good job or a high-paying job where you have money in excess, and everybody has emergencies that come up. And a lot of people don’t have savings nowadays due to the economy and they have to be able to access money quickly for emergencies. And you just can’t walk into a bank or a lending institution and get that. So, you’re reduced to having other ways of getting it. Places like this are open and people can walk in. Nothing is hidden. Everything’s on paper. You can read it right there. They tell you upfront what you pay back. There’s nothing that really can harm you while doing this, and it helps you out of a bind right away.

What would happen to you or the community if these services were eliminated?

I could see a lot of people that are on social security or disability really having a hard time making ends meet at the end of the month when they have no money left, when they have to pay – I know a lot of people who are on fixed incomes who have spend-downs to meet before they can even get their medicines. If they haven’t met those spend-downs and some of them are really high. You take an elderly person who has to meet a $278 spend-down such as my mother, what does she do toward the end of the month when she hasn’t met that spend-down yet she’s out of her meds until the end of the month? How does she make it? How does a cancer patient make it? How do you go on doctor visits if you’re sick all of the sudden? How do you access food if you’re out of food stamps or you just don’t have the money to get that? Or you child gets sick. What do you do?

What would you say to those people trying eliminate these services?

I would say try living on the means and the income that most of the people in Mt. Vernon live on without your family money, without the incomes that you’re making now. You try to live on what most people in here or around this community such as Knox or Morrow county and all of them, you live on what the basic income is, and let’s see how well you do if you don’t have the kind of credit established at a bank where you can walk in and get money handed to you within a couple of days.

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